Carnival's Profit Growth Remains Submerged

Carnival Corporation (NYSE:CCL) (NYSE:CUK) reported strong sales and better-than-expected profit growth during its second quarter. However, pesky fuel costs continue to dent total profit growth, and this has been a common occurrence in recent years. Given where the stock is currently trading, Carnival's investment appeal is questionable. (For more on the effect of fuel prices and oil, read Peak Oil: Problems And Possibilities.) Second Quarter Recap
Revenues advanced a very healthy 10.8% to $3.6 billion, as passenger ticket sales improved 11.1%, to account for 76.7% of the total top line. Onboard revenues from the sale of alcohol and spa treatments, such as from partner Steiner Leisure (Nasdaq:STNR) that runs spa services on a number of cruise lines, rose 10.9% to account for 22.6% of total sales. Net revenue yields, an industry measure of passenger capacity, rose 2.3% and came in at the high end of management's previous expectations.

Operating cost growth outpaced sales growth, rising 16.4% to $2.5 billion. The main culprit was fuel costs, which rose nearly 40% to $579 million. Management was able to control SG&A expenses, which increased 8.9%. The end result was a 20% drop in operating income to $279 million.

Lower interest expense and higher other income helped temper the net income decline to 18.3% as net income fell to $206 million. Earnings fell a similar amount to 26 cents per diluted share, to beat analyst projections by about 3 cents. (To learn more about how these numbers affect a company's success, see How To Analyze A Company's Financial Position.)

Outlook
For the full year, management projects earnings between $2.40 and $2.50 per diluted share, or about even with last year's profit of $2.47 per diluted share. Analysts currently expect full-year revenue growth of 8.5% and total sales of nearly $16 billion.

Management summed up the first half of its fiscal year by stating that, "Despite the considerable challenges we have faced this year, the long-term fundamentals of our business remain sound." Overall demand for cruises continues to grow strongly throughout the world, as it has for a number of years, and future projections remain robust, as a small percentage of the global population has yet to ever take a cruise vacation.

Yet despite strong sales growth over the past five years, profit growth has been absent. Back in 2006, Carnival reported sales of less than $12 billion, but earnings of $2.70 per share. So while sales are up by a third, profits will be down nearly 10%, based off full-year expectations. Rival Royal Caribbean (NYSE:RCL) is in the same boat, with profits still below what it reported back in 2005.

The Bottom Line
Volatile fuel costs are to blame, as is the latest recession. Carnival and Royal remain the two market leaders by a wide margin, with small players including Walt Disney (NYSE:DIS), which operates a small fleet of cruise ships. Over the long haul, profit growth should follow the strong and robust top-line trends, but it has been some time since this has occurred. At a forward P/E above 12, the risk/reward tradeoff doesn't look over compelling for Carnival's stock. (To gain a better understanding earnings results, check out Surprising Earnings Results.)

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